Last July, the FASB issued new disclosure guidance significantly expanding existing financial statement reporting requirements for both public and private companies in the U.S.
ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, is effective for both interim and annual reporting periods ending after December 15, 2010, for public companies and after December 15, 2011, for private companies. As a result, public companies must begin making disclosures in accordance with the new requirements early this year, and private companies in early 2012.
The biggest change required by ASU 2010-20 is the need for companies to provide information for both the finance receivables (loans) and the related allowance for credit losses at disaggregated levels. The level of disaggregation will be defined by one of two new terms introduced by ASU 2010-20:
1) A portfolio segment is defined as the level at which an entity determines its allowance for credit losses.
2) A class of financing receivable is defined as a group of finance receivables determined on the basis of their initial measurable attribute, risk characteristics and an entity’s method for monitoring and assessing credit risk.
Industry experts say that this new disclosure guidance reflects the fact that the FASB is responding to a demand for greater transparency into borrowers’ exposure to credit losses from lending arrangements. The goal is to provide readers of financial statements with information that will help them understand the nature of credit risk in a company’s financing receivables, as well as how that risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period.
For banks, the requirements will require an understanding of new stratifications that they may not be familiar with. The result will likely be higher accounting and compliance costs for most financial institutions. Please call us if you have any questions.